Harrison Day 3: Gas a no-brainer, the vigor of negotiations, RFP - WTRF 7 News Sports Weather - Wheeling Steubenville

Harrison Day 3: Gas a no-brainer, the vigor of negotiations, RFP

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With cross examination of FirstEnergy witnesses complete, the third and final day of evidentiary hearing focused on arguments against subsidiary Mon Power's proposal to buy the Harrison power station, heard May 29-31 before the Public Service Commission of West Virginia.

FirstEnergy wants Mon Power to buy the 80 percent it does not own of the coal-fired plant from sister Allegheny Energy Supply for more than $1 billion. The company asserts that Harrison is the best solution to Mon Power's current and growing shortfalls in meeting the electricity needs of its own and Potomac Edison's ratepayers.

Opponents say the utility should diversify its generation beyond coal. Among a range of other objections, they express suspicion that the agreement between the affiliates was not conducted at "arm's length" and  they say the price is twice what it should be and violates an earlier commission order.

Cross examination on day 3 explored these intervenor concerns.

Fuel diversity: Gas a "no-brainer"

The near-total dependence on one fuel that the proposed transaction would mean for Mon Power came up repeatedly throughout the hearing.

Billy Jack Gregg, formerly director of the commission's Consumer Advocate Division and now a consultant and witness for the CAD, recommended in his written testimony that natural gas should be part of Mon Power's solution. He elaborated during the hearing when Commissioner Ryan Palmer asked him whether the historical volatility of natural gas prices should be a concern.

"All fuel prices are volatile," Gregg said, coal as well as gas, as recent experience has shown.

But, he said, the success in recent years of horizontal drilling and hydraulic fracturing technology has made a much larger supply of gas available, bringing greater price stability.

"And the fact that the Marcellus gas field is coterminous with the service area of Mon Power makes it a no-brainer," he said, adding that the need for the company "to diversify the risk inherent in putting its eggs all in one basket with one fuel seems self-evident."

How would the cost compare?

CAD witness James Richard Hornby testified that a new natural gas combined cycle plant would have much lower fixed cost than the Harrison plant — and, according to the companies' own data, would have operating costs similar to Harrison's.

The vigor of negotiations

PSC Consumer Advocate Byron Harris expressed concerns raised throughout the hearing about the vigor with which Mon Power ratepayers were represented in the negotiations with AE Supply, and the suspicions that the proposal was crafted to transfer risk from AE Supply and FirstEnergy to Mon Power ratepayers.

The argument goes like this: AE Supply was known to have financial problems at the time the transaction was developed and proposed. Selling its interest in Harrison would bring in a large amount of cash. And the transfer of coal-fired generation — which many utilities are shifting away from, with new regulations coming on coal and natural gas now persistently cheap — out of the unregulated Ohio market, where it would have to compete, into the regulated West Virginia market, where it would be guaranteed a rate of return from captive ratepayers by the commission, would be a win-win for the parent company.

Asked by companies' attorney Chris Callas whether Harris had identified any evidence of undue influence over the transaction, Harris said yes.

"My testimony has the Moody's analysis of the precarious issues involved," he said. This refers to a bond rating of BBB-, the lowest investment-grade rating, just above junk.

"I quote the company's treasurer about the need for the Harrison transaction to solve the balance sheet problems of AE Supply," and FirstEnergy CEO Anthony Alexander's statement in the first-quarter earnings call in May that the transaction was "no longer critical" to solving AE Supply's financial problems.

Harris also referenced testimony from company witness and recently retired vice president Stanley Szwed indicating that neither he nor colleague Michael Delmar, who together handled the negotiations on behalf of Mon Power, raised any of several points that could have reduced the rate impact on Mon Power customers — possibly cutting it by half or more.

More on Requests for Proposal

Nearly all of the intervenors in the case ask that FirstEnergy test the market by issuing Requests for Proposal, or RFPs, seeking bids for solutions to Mon Power's shortfalls.

FirstEnergy has argued that such a process can take the better part of a year, and then longer if the solution turns out to be a plant or plants that have to be built.

But surprisingly low prices coming out of regional grid manager PJM Interconnection's auction for 2016-17 and announced May 24 support the idea that power markets will be affordable for the several years it might take to establish a more rigorous solution.

Callas himself granted, as he and Harris acknowledged together that an appraisal is an accepted way of establishing value when time is of the essence, that "going to the market is always the best way to establish what the value of something is, by definition."

West Virginia Citizen Action Group attorney William DePaulo suggested that the commission could in fact stay the proceedings pending market information gleaned from an RFP process.

Other notes

Citizen Action Group witness Cathy Kunkel of Kunkel Energy Research was asked by Palmer about the applicability of studies cited in testimony that demonstrate ratepayer savings from energy efficiency programs if the studies weren't conducted in West Virginia.

States around the country are doing substantially more with energy efficiency than the companies have proposed in West Virginia, and those states have electric bills both lower than and higher than those in West Virginia and span a range of geographies and climates, Kunkel said.

"I think there's really no question of why these programs that have worked well in a variety of other states would not be applicable in West Virginia," she said.

And Gregg, who has long experience with utility proceedings in the state, introduced a relevant historical point.

He recalled that, in the mid-1990s, suppliers of high-sulfur coal were determined to be among those benefiting most from the installation of billion-dollar scrubbers that would allow power plants to meet air pollution rules even when burning high-sulfur coal. Those suppliers were brought to the table, he said, and asked to allow more favorable pricing, and those savings were passed through to ratepayers.

Gregg noted that FirstEnergy has argued that Harrison would run more under regulated generator Mon Power than with competitive generator AE Supply as majority owner, and that commission approval for the proposal would help secure that market for West Virginia coal — particularly for coal from Consol Energy's adjacent Robinson Run mine.

"While ratepayers have been asked to pony up in this case to get the supposed benefits of the transaction, I don't see anybody suggesting that one of the main beneficiaries, namely Consol, should also come to the table and offer some concessions," he said. "If this transaction or any part of it goes forward, I think that should be part of the calculation as well."

As the hearing drew to a close, Chairman Michael Albert said the transcript would be available by June 14. He asked that initial briefs be filed by July 9, with reply briefs by July 19.

There is no statutory deadline for a decision.

But meanwhile, the commission is gearing up to do it all again in six weeks for a similar proposal from AEP's Appalachian Power and Wheeling Power Co., case number 12-1655. Intervenor testimony is due in that case on June 18 and rebuttal on July 8, with a hearing July 16-18.